Motley Fool Money Podcast Summary: "Right Trend, Wrong Stock" Released on March 29, 2025

Hosts:

• Dylan Lewis
• Ricky Mulvey
• Mary Long

Guests:

• Patrick Battalato – Associate Professor of Instruction at the University of Texas at Austin's McCombs School of Business, specializing in accounting.

1. Introduction

Mary Long opens the episode by introducing Patrick Battalato, highlighting his expertise in accounting and his recurring contributions to Motley Fool Money. She outlines the episode's focus: examining companies that successfully identified and capitalized on market trends but ultimately failed to translate these trends into profitable, growing businesses. Specific case studies include Blue Apron and Beyond Meat, alongside discussions on competitive dynamics and strategic partnerships.

2. Understanding the Right Trend vs. Wrong Stock

Ricky Mulvey initiates the discussion by referencing a previous conversation about apartments in multifamily REITs in the Sun Belt. He illustrates how investors can accurately predict macro trends—such as migration to sunnier climates and increased remote work—but still experience losses if the chosen stocks fail due to overbuilding and market adjustments.

• Ricky Mulvey [02:12]:
  "When investors get a trend right, like the Sun Belt migration, the stock they choose can still end up being a loser if it lacks sustainability or faces unforeseen challenges."

Patrick Battalato adds depth by emphasizing that "the price you pay matters", suggesting that even with the right trend, investing in companies without a sustainable competitive advantage can lead to poor performance.

• Patrick Battalato [00:01]:
  "It's easier to add an app to infrastructure than infrastructure to an app... existing infrastructure can overtake innovative apps by leveraging their scale and resources."

3. Case Study: Blue Apron

Blue Apron serves as a primary example of a company that capitalized on the meal kit trend but struggled with execution and sustainability.

Key Points Discussed:

• Explosive Growth vs. Sustainability: Blue Apron experienced rapid revenue growth from $80 million in 2014 to nearly $800 million in 2016. However, heavy reliance on promotions and marketing led to high customer acquisition costs and challenges in customer retention.

• Unit Economics and Competition: Selling meal kits, which are essentially commodities, posed thin margins similar to the grocery industry. The added costs of last-mile delivery and maintaining fresh supplies further strained profitability.

• Competitive Pressure from Grocers: Established grocery chains entered the meal kit space, leveraging their vast distribution networks to undercut Blue Apron.

• Strategic Partnerships and Risks: Patrick emphasizes that partnerships, like those with grocery stores, can be double-edged swords. While they offer distribution advantages, they also expose companies to the risks of being supplanted by their partners.

Notable Quotes:

• Patrick Battalato [06:08]:
  "The common stupidity to avoid is trend extrapolation or getting overly excited about growth rates when the primary driver is something that won't continue."

• Ricky Mulvey [07:24]:
  "Blue Apron made promises about a hard-to-replicate value chain, but grocery stores already possessed the infrastructure to enter and dominate the meal kit market."

4. Case Study: Beyond Meat

Beyond Meat is analyzed to understand how even with aligning trends—such as the shift towards plant-based diets—stocks can underperform.

Key Points Discussed:

• Revenue Growth and Margin Improvement: Beyond Meat showcased impressive revenue growth and improving gross and operating margins, indicating better unit economics over time.

• Distribution Dependencies: Despite growing through partnerships with major distributors like Walmart and fast-food chains, Beyond Meat remained reliant on third-party distributors, which posed sustainability challenges.

• Competitive Threats: Large animal-based meat manufacturers like Cargill Foods leveraged their extensive distribution networks to introduce similar plant-based products, posing an existential threat to Beyond Meat.

Notable Quotes:

• Patrick Battalato [20:21]:
  "When expanding through third-party distributors, there's a risk that larger competitors can enter the space, leveraging their scale to dominate distribution channels."

• Ricky Mulvey [19:29]:
  "Being a first mover is not always an advantage... Who really controls the distribution and can walk away when it suits them?"

5. Strategic Partnerships and Competitive Dynamics

The conversation delves into how strategic partnerships can influence a company's trajectory:

• McDonald's and Beyond Meat Partnership:
  Patrick critiques McDonald's approach to co-developing the McPlant burger, suggesting that the fast-food giant may eventually internalize the product, thereby sidelining Beyond Meat.

  • Patrick Battalato [27:42]:
    "McDonald's could participate fully in the upside while mitigating downside risk by keeping control over the McPlant brand and distribution."

• Comparison with Other Industries:
  Ricky draws parallels with sports gambling companies, noting that while both meal kits and gambling platforms have high customer acquisition costs, the inherent addictiveness of gambling offers a more sustainable engagement model.

  • Ricky Mulvey [15:51]:
    "Gambling companies use consumer data and psychology to enhance customer retention, giving them an edge over commoditized products like meal kits."

6. Insights from Seth Klarman

Ricky introduces a quote from valued investor Seth Klarman, emphasizing the dangers of overestimating the longevity and profitability of trendy products.

• Seth Klarman [Quoted at 34:28]:
  "Investors are often overly optimistic about the sustainability of a trend, the ultimate degree of market penetration and the size of profit margins."

Patrick Battalato agrees, using Coca Cola as an example of a company once seen as having an unbeatable competitive advantage but now facing significant competitive and regulatory pressures.

• Patrick Battalato [36:46]:
  "Even brands like Coca Cola must continuously innovate and adapt to changing consumer preferences and external regulations to maintain their competitive edge."

7. Current Comparisons: Nvidia and Celsius

To apply the discussed concepts to contemporary companies, Ricky compares the forward earnings multiples of Nvidia and Celsius to that of Coca Cola, questioning whether these companies possess sustainable competitive advantages akin to Coca Cola.

• Ricky Mulvey [39:09]:
  "Nvidia's forward earnings multiple is about 26, similar to Coca Cola's 24. Should investors view Nvidia with the same lens, or does it deserve a higher multiple?"

Focusing on Celsius, they explore its partnership with Pepsi and the implications for its growth and sustainability.

• Patrick Battalato [40:16]:
  "Celsius's agreement with Pepsi significantly boosted its sales, but dependency on Pepsi poses both an opportunity and a constraint for future growth."

Notable Quotes:

• Ricky Mulvey [34:25]:
  "When excited about a partnership, always assess the true nature—who holds the upper hand and can walk away if needed."

• Patrick Battalato [43:31]:
  "With partnerships like Pepsi, it's essential to understand how much control and influence the distributor has over the company's growth trajectory."

8. Final Lessons and Conclusions

The episode concludes with key takeaways for investors:

• Sustainable Competitive Advantages:
  Ensure that the companies you invest in possess durable competitive advantages beyond capitalizing on current trends.

• Strategic Partnerships:
  Analyze the dynamics of partnerships to understand who holds the power and how it affects the company's long-term prospects.

• Unit Economics:
  Scrutinize unit economics to assess whether growth is sustainable without excessive reliance on promotions or unstable drivers.

• Diversification and Adaptability:
  Companies must continuously adapt to changing market conditions and diversify their offerings to maintain relevance.

Final Quote from Ricky Mulvey [34:06]:
"So the lesson for investors listening is you really need to think about sustainable competitive advantages, especially when there's a crowded marketplace."

3. Conclusion

"Right Trend, Wrong Stock" serves as a comprehensive exploration of how aligning with the right market trends is insufficient without a sustainable business model and competitive advantage. Through in-depth analyses of Blue Apron and Beyond Meat, the hosts underscore the importance of unit economics, strategic partnerships, and adaptability in achieving long-term investment success. The episode reinforces the adage that while trends can guide investment decisions, the intrinsic strength and strategic positioning of the company ultimately determine its stock performance.

Note:
While the podcast provides invaluable insights, Mary Long advises listeners to conduct their own research and not to make investment decisions solely based on podcast discussions. Motley Fool Money adheres to strict editorial standards, ensuring unbiased and trustworthy content.

This summary captures the essence of the "Right Trend, Wrong Stock" episode, highlighting key discussions, insights, and expert opinions to provide a comprehensive overview for those who haven't listened.